Automotive Alert

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Automotive Alert

Trump Trade Policy – Potential Vehicle Assembly

Exposure and Risk in North America

18 January 2017

© 2017 LMC Automotive Limited, All Rights Reserved.

www.lmc-auto.com


Executive Summary

• Manufacturing in Mexico, Canada, or outside the US in general, has come under threat from the

incoming Trump Administration. Since the campaign, Donald Trump has said that a border tax would be

in place for imported vehicles, although the tax has never been quantified. Furthermore, NAFTA could be

at risk.

• The US currently accounts for two thirds of North American vehicle production but significant investment

plans and decisions to re-source capacity from Asia and Europe to Mexico are expected to bring Mexican

production from 19% of NAFTA today to 26% in 2020.

• The potential for penalty on vehicles manufactured within NAFTA but outside the US may impact existing

vehicle sourcing and future NA production mix and vehicle decisions, many of which are already in

process. Until specific policy is detailed, the environment is fluid and uncertainty remains high, as the

industry plans for the future. Aversion to policy risk, and to the threat of negative publicity, has become a

significant consideration for planners.

• While sourcing changes to the US have been announced by several manufacturers, further production

shifts from Mexico, Canada or elsewhere, to the US are possible. We expect manufacturers to continue to

publically announce investment plans in the US even if they are not directly linked to the election.

• Ultimately, any sourcing change would bring disruption to the supply chain. Component manufacturers

have either heavily invested or planned large investments in Mexico based on sourcing requests and

decisions from the vehicle manufacturer that have announced new capacity.

• The key will be for OEMs and suppliers to have proactive plans that identify potential program risks,

identify capacity exposure, and develop contingencies to help reduce the impact of policy changes

going forward. The following alert helps identify which OEMs are at most risk for sourcing changes

given these potential challenges.

© 2017 LMC Automotive Limited, All Rights Reserved.

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US Light Vehicle Sales Environment – Plateau

2013

2013

2014

2014

2015

2015

2016

2016

2017

2017

2018

2018

2019

2019

2020

2020

US Sales (Millions)

15.57

16.49 17.45 17.54 17.56 17.59 17.51 17.51

US Imports Outside NAFTA

21.3%

20.3%

20.8%

21.5%

20.4%

20.6%

19.5%

18.9%

• US Light Vehicle demand flattens throughout our forecast horizon, creating a highly

competitive market that will likely out pressure on profit margins.

• The number of vehicles sourced within the North American region increases as OEMs localize

production capacity and more than 50% of the increase is currently expected to be in Mexico.

Source: LMC Automotive

© 2017 LMC Automotive Limited, All Rights Reserved.

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Millions

NA Production and Capacity Long-term Trend

Utilization %

• North America demand level adds stability layer through horizon.

• Localization and exports drive production expansion, with Mexico adding 1.3mn units. Even with

substantial investment, utilization holds in the 85% to 90% range.

• Production in US adds nearly 200k units and grows by 2%, while Canada contract.

Source: LMC Automotive

© 2017 LMC Automotive Limited, All Rights Reserved.

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NA Production by Country – OEM Breakdown

4,000k

Most manufacturers are expected to increase share of

Mexico production mix over the forecast horizon

3,500k

3,000k

2,500k

2,000k

1,500k

1,000k

500k

0k

2016 2020 2016 2020 2016 2020 2016 2020 2016 2020 2016 2020 2016 2020 2016 2020

FCA Ford GM Honda Hyundai Renault-Nissan Toyota VW

Mexico 438 460 387 757 717 866 255 244 109 380 837 895 140 352 433 729

Canada 577 435 272 184 519 318 414 425 0 0 0 0 600 463 0 0

USA 1,538 1,483 2,395 2,237 2,396 2,301 1,293 1,361 753 707 1,012 788 1,376 1,372 94 154

Source: LMC Automotive

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US Sourcing and Mexico Exposure

% Of US Sales Mexico Built

2020 2016

Volkswagen

Mazda

Renault-Nissan

GM

Ford

BMW

Hyundai

Toyota

FCA

Honda

Daimler

Tesla

Fuji Heavy

0% 20% 40% 60%

• Most OEMs are increasing their sourcing from

Mexico for vehicles sold in the US after

significant investment plans.

• Even with concessions and new US investment,

Ford’s presence grows with Focus shift to

Hermosillo from Michigan Assembly.

• GM mix shifts to Mexico with

Cruze/Equinox/Terrain output relocation.

• FCA declines with re-sourcing both inside and

outside NAFTA, but still over 10% Mexico mix.

• Toyota’s new San Luis Potosi plant is planned

to open in 2019, but could be under pressure

even after $10b investment announcement.

• VW increases on new Audi San Jose Chiapa

plant along with LWB Tiguan production in

Puebla.

• BMW’s mix from Mexico approaches 20% with

new San Luis Potosi plant to produce 3 Series

and derivatives.

Source: LMC Automotive

© 2017 LMC Automotive Limited, All Rights Reserved.

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US Sales Exposure by OEM Group

OEM

Imported Outside NAFTA US Sourced Mexico Sourced

2016 2020 2016 2020 2016 2020

Notes

Volkswagen 55% 43% 12% 17% 32% 40% Highly exposed both inside and outside NAFTA

Mazda 86% 75% 0% 0% 14% 25% Mazda3 at risk with sourcing mix change

Renault-

Nissan 24% 25% 54% 50% 22% 25% US mix declining, Mexico presence increases with COMPAS JV

GM 7% 6% 65% 66% 14% 19%

Imports outside NAFTA reduced, but popular model sourcing shifts to Mexico

a risk

Ford 2% 4% 79% 73% 12% 18%

Concessions made but mix of US sourced vehicles declining with Mexico

growing

BMW 72% 48% 28% 35% 0% 18%

US sourcing increasing with new X7, but new San Luis Potosi plant will get

exposure

Hyundai 52% 42% 48% 44% 1% 14%

New Monterrey plant for Kia Forte, Hyundai Accent and Kia Rio boosts

Mexico presence

Toyota 27% 21% 48% 49% 5% 12% Corolla and Tacoma shift to Mexico already exposed

FCA 7% 9% 54% 61% 18% 12% Could be okay given proactive announcements of plans already in place

Honda 0% 2% 68% 70% 11% 8% Some risk but can tout CR-V move from Mexico to US

Daimler 50% 49% 50% 46% 0% 5% COMPAS JV with Renault-Nissan adds Mexico presence, high import risk

Fuji Heavy 60% 34% 40% 66% 0% 0% Strong presence in US with further investment expected

Tesla 0% 0% 100% 100% 0% 0% All US sourced

Imported Outside NAFTA US Sourced Canada Sourced

OEM 2016 2020 2016 2020 2016 2020

GM 7% 6% 65% 66% 15% 9%

Ford 2% 4% 79% 73% 7% 5%

Toyota 27% 21% 48% 49% 20% 18%

Notes

Mix falling with Oshawa 2 closure, but Large Pickup shift with new Unifor

contract a risk

Limited exposure, but source popular Ford Edge and Lincoln MKX from

Oakville

Mix declining with Corolla shift to Mexico, but Toyota RAV4 and Lexus RX

remain

FCA 7% 9% 54% 61% 21% 18% No new capacity planned, but tariffs could impact popular Midsize Vans

Honda 0% 2% 68% 70% 21% 20% Alliston plants produce keys to their portfolio - Honda Civic and CR-V

Source: LMC Automotive

© 2017 LMC Automotive Limited, All Rights Reserved.

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North America Planned Capacity Investment

North American vehicle production capacity is expected to increase by 3 million

units through 2023, nearly 50% of that growth is currently planned in Mexico

18.8mn

22.0mn

2.3mn

2.4mn

3.7mn

5.5mn

Canada

Mexico

USA

12.6mn

14.2mn

2015 2023

2015 - 2023

Source: LMC Automotive

Δ 1000s Growth % Δ

Canada -100 -4%

Mexico 1,741 47%

USA 1,573 12%

Total Capacity 3,214 17%

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Other Considerations

• LMC’s baseline forecast for US Light Vehicle demand over the next few years is in the 17.5 – 17.6 million unit

range. Given a large number of variables and policy uncertainty there are forecast scenarios that support

both upside and downside volume expectations.

• Upside +300-500k – Trump’s fiscal stimulus package is more substantial, with US$1 trillion worth of personal income

and corporate tax cuts and a US$250 billion public infrastructure investment plan. In addition, a less protectionist

stance is taken.

• Downside -400-600k – Trump reverts to a highly protectionist and isolationist stance, fails to implement a significant

fiscal stimulus package and proceeds with immigration curbs and deportations that result in substantial labor force

declines. Against a backdrop of heightened uncertainty, the US and global economies are badly shaken.

• There have been several recent announcements of investment in US operations or the cancelations of

investment in Mexico by OEMs. This appears to be the direct result of pressure from Trump holding to his

campaign promise of penalizing companies for manufacturing outside the US. However, many of these

decisions were already planned or were altered due to other factors, such as lower demand for small

vehicles or shifting higher margin or complex vehicles to the US, and not solely the result of the pressure.

• Initially a spotlight has been directed towards the Detroit Three but that has expanded to include Toyota and

BMW, so all brands selling vehicles in the US sourced from other countries are likely to face similar attention.

While this might prove challenging, since the industry has been operating under NAFTA as a single market,

we do expect the auto sector to be able to adapt to policy changes providing apply to all industry players

equally. Note that increased trade barriers would likely cause an increase in costs which may ultimately be

passed onto the consumer.

• Without substantial investment to assembly plants in the US, it would be difficult to absorb more than an

additional 500k units of volume from Mexico or elsewhere. The creation of new capacity in the US would be

likely result in the closure of existing plants in Mexico, or running them severely underutilized. Either would

add cost, impacting profitability and have knock-on effects for the supply base.

www.lmc-auto.com

© 2017 LMC Automotive Limited, All Rights Reserved.

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© 2017 LMC Automotive Limited, All Rights Reserved.

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